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California Sales & Use Tax Exemption for Certain Manufacturing and R&D Equipment

On July 11, 2013, Governor Jerry Brown signed legislation (Assembly Bill 93 and Senate Bill 90) as part of his Economic Development Initiative that, among other provisions regarding hiring credits and investment incentives, enacts a California sales and use tax exemption for purchases of manufacturing and research and development equipment by biotechnology and manufacturing companies.


Exemption for Manufacturing and R&D Equipment  

Assembly Bill 93 creates a statewide sales and use tax exemption for certain tangible personal property purchased or leased between July 1, 2014 and July 1, 2022 that is used in qualifying manufacturing, processing, biotechnology and R&D activities. 

The exemption applies only to the 7.5% statewide sales and use tax rate, and does not extend to local sales and use taxes.

Specifically, the exemption would apply to qualified tangible personal property purchased:

  • to be used primarily (i.e., more than 50% of the time) in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property; 
  • to be used primarily in research and development;
  • to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described above; and
  • by a contractor for use in the performance of a construction contract that will use that property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with those processes.

Eligible Companies  

Eligible companies include manufacturers in aerospace, textiles, pharmaceuticals, printing, and food, as well as biotechnology research and experimental development activities in agriculture, electronics, environmental biology, botany, computers, chemistry, food, fisheries, geology, health, mathematics, medicine, oceanography, pharmacy, physics, veterinary, and other allied fields.  Extractive industries are not eligible for the exemption.

Qualified Tangible Personal Property  

“Qualified tangible personal property” includes, but is not limited to, all of the following:

  • Machinery and equipment, including component parts;
  • Equipment or devices used or required to operate, control, regulate, or maintain the machinery;
  • Tangible personal property used in pollution control; and
  • Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling processes (excludes warehousing).

Limitations  

A taxpayer or combined group cannot claim the sales and use tax exemptions on the portion of qualified property purchased that exceeds $200 million annually.

The sales and use tax exemptions will also not apply to property that is removed from California or is converted to a non-exempt use within one year of purchase.
 

 

Stephen Valentine is a Senior Tax Manager with 10 years of public accounting experience. He serves high net worth individuals and closely held entities across a wide range of industries including tax compliance, planning and research.

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